Monday, July 28, 2014

Great Example of Chinese Misallocation of Capital

Incredible NYT story about the lack of food refrigeration, and therefore food safety, in China:

"These statistics translate into scenes that would concern most American food-safety inspectors. In Shanghai, for example, one large pork processor has no refrigeration system; instead, it does all its slaughtering at night, when the temperature is slightly cooler, in a massive shed with open sides to allow for a cross breeze. The freshly disemboweled pigs hang for hours in the smoggy air. In Beijing, at the wholesale market that supplies 70 percent of the city’s vegetables, vendors carefully excavate individual, naked stalks of broccoli from trucks packed solid with ice and hay. A middle-aged farmer, bundled up against the cold, told me that he expects to have to throw away a quarter of the truckload — more when the weather is warm — as the ice melts and the vegetables rot faster than they can be sold."
What misallocations of capital their economic system produces! The bulls will tell you that the empty Chinese apartment and office towers are just cleverly built in advance of need by very forward thinking central planners.

But does it make sense to build empty buildings when your agriculture is pre-modern and butchers in the largest city in your country (where it's 90 degrees and 90% humidity today) slaughter pigs in a building with no cooling?

Here's a WSJ article about the lack of refrigeration in China that supports what the NYT article said. They quote a consulting firm that estimates the economic losses from the lack food refrigeration in China are about $15 billion annually, and that it would cost $100 billion to have "an efficient and safe food-distribution system" that included refrigeration. (Not sure whether the benefit estimate included avoiding food poisoning or was just from avoiding spoilage.)

It seems to me that a 15% annual return beats the negative cap rate on properties without tenants. But maybe you need to be on the 中国共产党中央委员会 to understand?

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